The war was over almost before it began. Kraft Heinz’s shock attempt to pull off the second largest corporate merger of all time crumbled into dust within days.
But though the US conglomerate’s £115bn bid for Unilever has been called off, it’s sent shockwaves through the fmcg sector that will reverberate for months if not years to come. The Grocer answers the key questions raised by Kraft Heinz failed pursuit of the Marmite and Dove owner.
Why did the £115bn mega-deal fall apart so quickly? Kraft Heinz felt forced to declare its hand after discussion of a possible deal on the Financial Times’ Alphaville blog. Kraft Heinz would clearly have preferred to keep discussions private but it seemed to underestimate the ferocity of feeling against its approach - first from the Unilever board who said its approach had “no merit, either financial or strategic”; and perhaps more important (as a hostile takeover may well have been in its plans), the complexity of taking control of the Anglo-Dutch business, with the Dutch side in particular a real hurdle, due to its complex share ownership structure, and also given the stronger powers the country’s takeover rules give stakeholders than in the UK. Indeed Dutch PM Mark Rutte used to work at Unilever. (The UK PM’s office issued a statement saying it had got involved at such an early stage, though Teresa May was understood to be taking an active interest in the deal.)
What were Unilever’s objections to the deal? The $50 a share offer and 18% premium on Unilever’s pre-bid share price is pretty miserly by recent standards, particularly given Unilever’s emphasis on the higher growth home and personal care sector rather than the more challenging packaged foods side. There was also head-scratching over the level of cost synergies given they largely operate in separate sectors. And concern over the millstone of £70bn debt that would have been hung around Unilever’s neck had the approach succeeded. And even if Kraft Heinz had reached an acceptable premium - Bernstein estimated it could have stretched to $59 a share and offered a healthier 40% premium - the culture clash between the firms was palpable. Unilever’s ethos is built on long-term growth, sustainability and corporate responsibility. Kraft-Heinz’s modus operandi is a lot less touchy feely: it’s about inflating margins by cutting costs.
Is the deal definitely dead? Under UK takeover rules Kraft Heinz is banned for six months from a further approach unless Unilever welcomes its approach or another bidder emerges. That seems unlikely given the scale of the deal so a wholesale acquisition of Unilever looks off the table, but Kraft-Heinz and its high-profile investors - Warren Buffett and 3G - may revisit Unilever on a piecemeal basis.
Is this a victory for Unilever? It certainly represents a victory of sorts - Unilever has maintained its independence in the face of a powerful suitor, saved jobs and can continue to march to its own tune. But “despite the joy, this has been a somewhat humbling and chastening experience for [Unilever CEO] Paul Polman and Unilever,” said Bernstein’s Andrew Wood. “How can a €52bn sales company be put under threat from a US corporation less than half its size in sales?”
Unilever - and Polman in particular - will be under further pressure to deliver. After missing sales expectations in the fourth quarter amid slowing emerging market growth - a slowdown Polman admitted would continue until the second half of 2017 - Unilever has begun to put more focus on the bottom line. Its margins, though similar to Danone and Nestlé’s, are only half as healthy as Kraft-Heinz and also lag behind some key personal care-focused contemporaries like Colgate Palmolive and P&G.
How safe is Polman? Unilever’s chief is widely admired for his stable management of Unilever since 2009 and his admirable efforts to do business the right way have been supported by results. But there have been murmurs of discontent about his hobnobbing with the great and the good at the likes of the World Economic Forum in Davos, rather than concentrating on making more money for his investors. The Sunday Times pointedly asked earlier this year, after its disappointing annual results, if ‘Persil Paul should stick to selling washing powder’.
What does he need to do then? The clock is now ticking faster and louder for Unilever to deliver. nvestors will want to see that value realised one way or another. Simply put, Unilever needs to make more money and the fat margins of its suitor Kraft Heinz only intensify that focus. Unilever has already announced a doubling of its mid-term annual margin expansion from 20-40bp to 40-80bp and investors will now expect to hit the top end of this range. Previously announced cost-cutting plans may now need to be stepped up too (though Unilever already practices the so-called ‘zero-based budgeting’ perfected by 3G).
Unilever said on Wednesday it will launch “a comprehensive review of options” to step up the delivery of value to investors, the results of which will be announced in early April. Societe Generale’s Warren Ackerman also suggests it could make better use of its balance sheet through a share buyback, while other analysts suggest a special dividend to head off investor disgruntlement.
Should Unilever look to pull off some M&A deals of its own? The protest there was little synergy between household and personal care-heavy Unilever and food-centric Kraft Heinz also shines the light back on to Unilever’s own portfolio and once again raises the old question over whether it should spin off its food division. Most observers seem to agree that selling off food in its entirety is a step too far as opportunities to grow sales and margins remain. But Unilever is under more pressure to finally resolve its problematic spreads division. ‘Sprexit’ has long been mooted, as the category has fallen into structural decline, but it still contributes to Unilever’s bottom line, meaning the group has been reluctant to pull the trigger on a fire sale. Analysts see Kraft Heinz as a possible destination for the division, ripe for the 3G/Berkshire Hathaway consolidation treatment, perhaps accompanied by Hellmann’s and/or Knorr. This opportunistic approach may also force Unilever to look to acquire to ward off further pursuers or the return of Kraft Heinz. SG’s Ackerman is supportive of a strategic acquisition, suggesting US personal care business Edgewell or the “big prize” of Colgate. Bernstein’s Andrew Wood is less convinced: “We really struggle to see what value Unilever can add to Colgate.”
Is the 3G Capital/Warren Buffett ‘brand’ damaged by the affair? The rapid climbdown is something of an embarrassment for 3G and Buffett and their reputation as the savviest deal-makers in the consumer space. But they won’t be licking their wounds for long. The pair have only just pulled off the £79bn mega-merger between AB InBev and SAB Miller and will inevitably have identified alternative consumer groups they believe are underachieving.
Where does Kraft Heinz go from here? Like a shark, businesses that focus on squeezing margins can’t stay still for long or they die. Kraft Heinz also underwhelmed the market with its Q4 results last week and more deal-making looks inevitable. The $100bn dollar question is who’s next? It is unlikely to re-engage Unilever for at least a few years, unless it strikes a deal to take out a smaller portion of its food business. But many of the names mentioned - General Mills, Kellogg, Campbell - are US-centric businesses, which would help in terms of cost-saving synergies but perhaps not long-term growth. Other CPG firms have been mentioned to expand into higher growth categories, such as Colgate. Most focus seems to be on reuniting Kraft with Mondelez - the global snacks firm it spun out in 2012 after the Cadbury acquisition. Mondelez has a strong presence in emerging markets and the integration of a food group provides more obvious synergies than household and personal goods. Its shares were up almost 6% this week on the prospect of bid interest.
What has the Stock Market reaction been? Key investors have backed Unilever’s rejection of the bid, but t The potential short-term returns from a deal being struck saw Unilever shares rocket up 13.4% on Friday to 3,797p. The shares bumped back down to earth on Monday, falling 6.6%, but are notably still 7.5% higher than Thursday’s close as the feeling persists that a shocked Unilever will have to take action to benefit shareholders. Kraft Heinz shares were up 10.7% on Friday (after slumping 4.2% last Thursday on weak results) and remain up 8.7% as the market expects Kraft Heinz it to make another major play soon.